Question:
My question is as follows: I am now taking up a new job and wonder whether I can transfer my pension fund to the new employer or keep it in a pension preservation fund. Which one will be better? Do I legally have this choice? Should I take early retirement (I am eligible) or should I resign?
Answer:
Dave,
We cannot give you a specific answer (advice) without doing a full needs analysis. But in general, on leaving your current employer, you are required to leave your employer's pension or provident fund. If you have reached normal retirement age per your employment contract, you must "retire" from the fund.
If you resign, or you are dismissed or retrenched, you may retire from the fund, provided you are over 55. If you are younger than 55, you can only withdraw from your retirement fund; the proceeds are then referred to as a withdrawal benefit. These are your options:
Provident fund withdrawal (pre-retirement)
1. You can transfer tax-free to your new employer's pension or provident fund
2. You can transfer tax-free to a pension or provident preservation fund
3. You can transfer tax-free to a retirement annuity fund
4. You can withdraw fully or partially, and pay tax per the withdrawal lump sum tax table
Pension fund withdrawal (pre-retirement)
1. You can transfer tax-free to your new employer's pension fund
2. You can transfer tax-free to a pension preservation fund
3. You can transfer tax-free to a retirement annuity fund
4. You can withdraw fully or partially, and pay tax per the withdrawal lump sum tax table
Your question is: should you cash in your your current pension/provident fund, should you preserve it or should you transfer it to the new employer?
If your money was in a pension fund and your new employer has a provident fund, then you cannot move that money across without paying tax thereon, which may not be what you want at this stage. If you would be moving from a provident to a another provident fund or to a pension fund, then you can transfer free of tax. By keeping your money in a company fund, you may benefit by way of paying lower (group) fees relative to a preservation fund (a product for individuals), and it restricts your access to this money, which (discipline-wise) may be a good thing.
By keeping it in a pension or provident fund, you cannot access it until you leave your new employer. But if you stay with your new employer until retirement age, then you will be bound by the tax laws as to how you access that money (with a pension fund, you must use two-thirds to purchase an annuity, you can withdraw a provident fund entirely as a cash lump sum). With a preservation fund, you have the right to do one full or partial withdrawal before retirement; this means you retain the option to take a cash lump sum until the time you reach your normal retirement age (at which point, you will also have to buy a annuity if you preserve though a pension preservation fund).
So your choice of new employer fund and preservation fund boils down mainly to issues of relative fees and flexibility.
As to taking the cash, do you really need the money now? If you receive an income, then the answer is probably "no". Receiving the cash may cause you to pre-spend your retirement savings, you will pay more tax (any cash lump sums you take are taxed at a higher rate on withdrawal than on retirement), plus you will pay tax on interest and dividend income you will earn on that money once you invest it yourself. In a retirement/preservation fund. you only pay tax on money you receive (either as a lump sum or as an annuity). By preserving your savings in a preservation fund, you defer any tax on investment income plus you can still access the money at a later stage (pre-retirement), if necessary.
